Analysts seem to have the reasons to believe that new Governor of State Bank of Pakistan, Reza Baqir, has not understood the intricacies of Pakistan’s economy.
This perception gets credence if one just looks at the depreciation of Rupee on Wednesday, June 26, 2019. The day witnessed a decline of 3.8% in the Rupee’s value in a single day. The substantial fall in the value of Rupee took place after Governor central bank declared that the exchange rate would be market-based and the free float was not suitable for the country’s economy. Rupee has lost about 35% value since May 2018.
One of the prime mandates of any central bank is to contain exchange rate volatility. However, on Wednesday it seemed that the central bank either did not have any clue or just did not bother to make any attempt to bring calm in the volatile currency market. The day began with a fall and soon it became nosedive. One can still recall that in his first press conference, the Governor had assured that the central bank would interfere in exchange rate if the market became volatile.
According to reliable sources commercial banks have been actively buying dollars for the past more than 10 days and sold up to US$250 million on Wednesday. They also say that there was no shortage of dollars in the market, as money changers have been selling surplus dollars to the commercial banks at an average up to US$25 million per day. One wonders if sudden and substantial depreciation of the local currency is not the policy of economic managers, who are maneuvering and benefiting from the freefall. The 35% depreciation in the Rupee’s value since May last year must have a devastating effect on Pakistan’s economy as both the cost of production and margin of profits have shrunk for the local manufacturers.
The central bank had recently said that the current account deficit was the biggest enemy to the economy and also expressed intentions to bring it down to US$13 billion by the end of the current financial year; the deficit was US$19.9 billion last year. However, the intended cut in import bill and current account deficit failed in extending any support to the local currency.
It is a common belief that appointment of Reza Baqir as Governor SBP was approved by the International Monetary Fund (IMF). His first task was to negotiate a bailout package with his employer of 18 years and implementing the promised ‘reforms’, a fancy name to belt-tightening by increasing interest rate, hiking utility tariffs and containing/abolishing subsidies. However, one should not forget that all these measures yield lower GDP growth rate, create fewer new jobs and make utilities expensive.
While Baqir insists, “We haven’t accepted anything from the IMF that we thought wasn’t to our benefit”, the general public oppose IMF’s forcing austerity and raising interest rates. Noted economist Kaiser Bengali has publicly called Baqir the part of the “global capital’s first line of generals” flown in to implement a “predatory program” for the IMF.
Baqir claims that government borrowing would shift from the central bank to commercial banks because the former is inflationary. He acknowledged that the shift in the borrowing pattern would have the crowding-out effect on private-sector businesses. The only permanent way out of this dilemma is reducing the fiscal deficit, which is the primary reason for heavy government borrowing. The government borrowing from the central bank increased 97% between June 2018 and May 2019. In other words, the central bank helped the government fuel inflation by almost doubling its purchases of treasury bills and bonds in the last year.
In addition to the interest rate, Baqir added, the central bank is also using the exchange rate to implement monetary policy. “When the interest rate goes up, the opportunity cost of buying dollars increases, consequently, it affects the inflation rate”. The governor also expects that high interest rates will make it expensive for exporters and other segments of society to hold on to their dollar for long. Bringing inflation down is the primary responsibility of the incumbent government.
Baqir has been urging the press and the general public to have faith in policymakers, but skepticism runs deep on both sides. While there is open resentment against his appointment, his policy measures, endorsed by IMF are openly criticized by all, from policy planners to those who are being hurt due to high interest rate, hike in utility tariffs and cost pushed inflation rate. The critics openly say he will take some time to understand Pakistan’s economy, which is not identical to Egypt. They also say that most of the policies taught at business schools and universities do not come true in Pakistan, which is a unique market and needs out of the box policies to come out of the current mess.